TRID Exclusive, Part 3: Vendors, technology issues in the spotlight

The implementation of the TILA-RESPA Integrated Disclosure (TRID) rules always was about more than changing the disclosure forms. The rules created a new process for originating and closing mortgage loans, and a spotlight was focused clearly on the technology, and vendors used to create the technology, that would make this new process function.

TRID Exclusive series

In case you missed it: Part 1The Title Report delves into initial reactions from the industry to find out how the first round of TRID closings are going.

Now Available: Part 4The Legal Description helps you deal with real-life situations, including the "magical math" surrounding the simultaneous issue rate.

Early on, however, that process has not run as smoothly as the Consumer Financial Protection Bureau (CFPB) had hoped, CFPB Director Richard Cordray admitted to lenders at the Mortgage Bankers Association’s (MBA) annual convention and expo.

“I have been disturbed by reports I have been hearing about the vendors on whom so many of you rely. Some vendors performed poorly in getting their work done in a timely manner, and they unfairly put many of you on the spot with changes at the last minute or even past the due date,” Cordray said, adding that regulators may start paying closer attention to vendors.

CFPB spokesman Sam Gilford confirmed that the CFPB did receive reports that some vendors still were working through issues related to TRID.

“Nonetheless, we recognize that lenders have dedicated substantial resources toward implementation, and we remain confident in lenders’ ability to implement the rule and continue to provide access to credit. We have not advised lenders to avoid using particular vendors – market participants should focus on making loans in compliance with the rule,” Gilford stated.

Despite this expectation of compliance, technology is the most important thing that lenders will have to deal with when trying to follow TRID, said Rich Horn of Richard Horn Legal, PLLC, who led the final TRID rule when he was a senior counsel and special advisor at the CFPB, adding that he has seen areas where the technology is failing.

“There are some software vendors that have put in the time and resources and have gotten it right. But there are technology problems,” Horn said. “I’ve seen disclosures that have errors that were caused by technology; either the data didn’t make it to the right place in the system or there was a misinterpretation by the LOS on how the disclosures work. There are some tricky parts of the disclosure that seemed to have tripped up some of the LOS systems. I’ve seen rounding errors, misinterpretations of the Projected Payments table and the Calculating Cash to Close table. There definitely are problems with some technology vendors.”

John Haring, director of compliance enablement at Ellie Mae, said he also has heard stories about people needing to roll back software during the Oct. 3 weekend. Ellie Mae received a large volume of phone calls from clients, but mainly from clients who wanted to validate their understanding of their program rather than to report issues with the software.

“There are areas where I think people are still struggling a little bit to understand the forms themselves, asking how come the numbers in the Closing Disclosure don’t match the Loan Estimateand why those numbers don’t match the uniform loan application, but part of it is the way that the Loan Estimate and Closing Disclosure were designed,” Haring said. “The Loan Estimate doesn’t take into account aggregate adjustments or reduce the cash to close for fees that were paid outside of closing, and those two alone cause consumer confusion when they also get a uniform loan application that also has a cash to close figure but has different numbers based on different disclosure requirements. Plus the Loan Estimate is rounded and the Closing Disclosure and uniform loan application are not, so you’ll never have a perfect match.”

CrossCountry Mortgage Inc. is a client of Ellie Mae, and its CEO, Darrel Bilbrey, said the company so far has had a smooth rollout from an initial disclosures perspective.

“Now we’re going through the Closing Disclosures. It’s a learning curve,” Bilbrey said. “We are on Ellie Mae’s system, so we are partnering closely with them to help them make additional system enhancements to further streamline the process. … There’s still a lot of manual workarounds. The next three to six months, we’ll be focused on automating those.”

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For other lenders, the transition has not gone over as smoothly.

Testifying before a Senate Banking Committee subcommittee, Terry Foster, executive vice president and CEO of Mifflin County Savings Bank, was asked by Sen. Tim Scott (R-N.C.) to share any first-hand accounts of how TRID was affecting the lending process.

“We are just basically backlogging mortgage applications at this point because there are a number of bugs we’re still trying to work out,” Foster said. “And so we’re being ultra-conservative and we’re not going to write the loan until we’re confident that the bugs are fixed now and there aren’t going to be any glitches in the final paperwork.”

Carrie Wood, president and CEO of Timberland Federal Credit Union, testified that although the credit union is not back-logging loans, it is facing technology issues.

“When we flipped the switch to the new forms, we had a glitch in the system. So we had to use the new forms, Oct. 2 we used the old forms, Oct. 3 we used the new forms. We dusted off the 40-year-old typewriter that we had at the office and brought it out and we are hand-inputting some of that information on the forms because the computer system just, it was a glitch. So that a lot more time is put into printing out a ‘simple’ form than what it really should be,” Wood said.

Despite the issues surrounding technology glitches, there are still areas where clarity of the rule itself is needed. This fact is highlighted by the volume of questions from clients, Haring said.

“People are not understanding the difference in how lender credits are handled between the Loan Estimate and Closing Disclosure – the contents of what is called ‘lender credits’ is the difference,” Haring said. “Customers are 100 percent in control in how lender credits are disclosed, whether the credit is for the rate, being applied to a specific fee, a general credit to reduce cash to close, or credit specifically for purposes of providing a tolerance cure. We actually spell out where to put each one, depending on how each one is intended to be disclosed. There’s been a couple calls we’ve had with customers to reinforce and go back through it, and everyone has walked away understanding what to do.

“Lenders are historically used to providing general lender credits on page 1 of the HUD-1 Settlement Statement and don’t realize that on the Closing Disclosure, general credits are disclosed as a reduction of closing costs. By continuing to follow old workflow and adding general credits to the Closing Disclosure’s summary of transaction, some lenders are essentially entering credits twice. For example, if you enter a general credit or specific credit against an individual fee and also as a tolerance cure, then it puts it in two places and it doubles up. It hasn’t been pervasive and it certainly wouldn’t cause a non-compliant loan.”

Haring also has noticed a lot of concerns around the use of the alternate Closing Disclosure and alternate Loan Estimate, particularly because lenders want to document ways they did principal reductions, refunds of mortgage insurance premiums affecting cash to close and other ancillary credits, and then not having an official place on the alternate version to do that.

Calyx Software also has received its fair share of questions regarding the rules.

The biggest problem Calyx has seen, according to Dennis Boggs, executive vice president of business development, has been confusion on how cash to close is being calculated.

“The CFPB really gave quite clear, black-and-white instructions. We followed the black-and-white way and believed we knew how it was supposed to be done,” Boggs said. “We also knew what we believed the intention of the CFPB was, so we did some things that were not in their actual words. About six or seven weeks ago, the CFPB called us and asked us, ‘How are you calculating cash to close?’ We told them how we’re doing it and they said, ‘That’s exactly how we wanted it to be done, but we’ve heard that other LOS’ have had a different interpretation.’ Then Oct. 3 hit, and at the point when government loan investors, mostly FHA (Federal Housing Administration), got involved, our clients started to be told by investors that because of the way cash to close was calculated, the investors wouldn’t buy the loans.

“The amount of money is the same, it just looks different,” he said. “What it really comes down to is that FHA and the CFPB are looking at loan amount differently, which causes a disparity in cash to close. They just don’t match. So we followed the CFPB requirement, and now investors are having an issue. We have gone back to the CFPB and been re-told again and again that our calculation is correct.”

A question that is still up in the air is whether the problems and questions that have surfaced over the last month because of technology issues and differing interpretations of the law will lead to an official TRID grace period from liability.

Foster testified at the Senate Banking subcommittee hearing that industry participants would be better off with a grace period to work through technology issues.

“We’re so reliant on our vendors. That’s our biggest fear right now,” Foster said. “We’re a couple weeks into this and our vendor is on its fifth update trying to fix, and I looked at just the other day, the litany of bugs in each update they’re trying to fix. We’re so dependent there. … A three- to six-month delay would be phenomenal.”

When the CFPB stated that it would consider good-faith efforts to comply with TRID, Horn said he thinks the CFPB was referring to inaccurate disclosures that are caused by the vendor’s software. Nevertheless, lenders still need to take action to address technology issues.

“I don’t think it will cause a civil money penalty or an informal enforcement action in the first examination,” Horn said. “But one thing to keep in mind is that the bureau, under their service provider bulletin, said you need to have a plan in place to monitor and take action if a software vendor is causing compliance problems. The lender has to take steps to address the situation, either having a backup vendor or canceling the contract with the vendor. Lenders may want to start investigating before an exam which vendors are fully compliant. The bureau is going to expect some kind of action.”

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The Federal Reserve Board, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. have issued information on the host state loan-to-deposit ratios, which are used to determine compliance under Section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Review the ratios in Dodd Frank Update’s Library.